Overcoming paralysis by analysis: How credit unions can embrace fintech partnerships to expand into new products

Publisher’s Note: CUInsight is hosting a free webinar Wednesday, March 23rd titled, “Overcome Paralysis by Analysis: Embracing Fintech Partnerships to Expand into New Products.” We hope you’ll join us! Register here.

The lending landscape has endured massive transformation over the years. Providing a high quality digital experience that is in line with consumer expectations has become a priority for credit unions that hope to differentiate against the competition.

In the past, underwriting systems were rigid and restrictive, serving only a select population of consumers. With the advancement of artificial intelligence, credit unions have the opportunity to lend more inclusively and have a strong opportunity to tap into unsecured consumer lending to serve their members’ needs.

Enabling More Inclusive Lending with AI

In the past, criteria for creditworthiness would vary from lender to lender and were largely subject to human bias. Additionally, if borrowers were eligible for one product and not another, they would often be denied for both – showcasing how credit scores fail to paint a full picture of creditworthiness. With the emergence of AI, new forms of data can be better leveraged to assess creditworthiness beyond the three digits of a credit score.

According to Margie Click, President and CEO of Agriculture Federal Credit Union (AgFed), with AI-driven underwriting processes, AI is enabling fairer, more inclusive credit decisioning. “It’s not only more efficient, but I think in a sense, it can be considered much more fair,” says Click.

Now, more individuals are getting better priced loans through their preferred digital channels, whereas before, they would have needed to transact solely in-branch and likely be given very high rates for a loan or denied altogether.

With the COVID19 pandemic accelerating members’ preferences for digital and increasing need for unsecured personal loans for quick access to capital, credit unions have been pushed to reinvent their borrowing practices.

“Either you’re going to fight the change, or you’re going to embrace it and run with it,” says Click, “and we’ve chosen to embrace it”.

Managing Risk

With AI at the forefront of automating and optimizing old systems, fraud has become a growing concern in the growing digital landscape. While the digitization of the lending process has helped remove human error, it’s created more opportunities for fraudulent activity.

In order to combat it, Click says, “you still need some human interaction at some point or some cases”.

While fingerprint requirements and periodic manual reviews are also some tools used to monitor potential fraud, credit unions that have deeper member relationships are better equipped to prevent fraud.

It’s much more difficult to understand a consumer’s risk if there’s been no initial contact or existing track record. However, if a credit union has worked with an individual for a while and they’re familiar with their deposit and loan patterns, it’s easier to conceptualize that risk.

According to Click, “it’s really important to have a very tight integration. One of the reasons we haven’t done a lot of outsourcing of staff on our operations side is being able to learn quickly on the product and automation. It’s a very tight feedback loop to effectively find and stop those kinds of attacks”.

Embracing Fintech Partnerships and New Technologies

AgFed is embracing the change by partnering with fintechs to develop new ways to serve more people. AI and machine learning enable more intelligent credit decisioning without increasing risk. 

According to Click, the vast majority of people within a subprime pool of loans, will repay their loans. With this knowledge, designing a model that will approve more people can not only improve access to capital, but also lower the rates for the average consumer.

If credit unions can approve more people while lowering the cost of borrowing, they’re not only empowered to exceed their current members’ expectations, but attract net new members as well.

Tune into the free webinar, presented on March 23, 2022 at 10 AM PT / 1 PM ET via Zoom. Register here. Log-in information will be provided upon registration.